Global economy is in a worse crisis than in 2008
“We are in a more dangerous situation than in 2008,” said George Soros, Chairman of prominent hedge fund Soros Fund Management, here on Monday, referring to the ongoing crisis in the eurozone. “We now face the prospect of a deflationary vicious circle, which is going to affect the real economy, the morning after a 25-year long party of leveraging,” said Mr. Soros, while participating in a conversation with Anurag Behar, Vice-Chancellor, Azim Premji University, and CEO, Azim Premji Foundation. Creditor nations such as Germany, he said, “are calling the shots by dictating the rules of a draconian austerity” programme in Europe.
Comparing the global economic meltdown of 2008 with the sovereign debt crisis in Europe, Mr. Soros pointed out that unlike the Federal Reserve System and the U.S. Treasury, which worked in unison after the collapse of Lehman Brothers, the European Central Bank did not have a treasury counterpart to enable an effective intervention. “While the central bank is supposed to deal with the problem of liquidity, a treasury is needed in order to intervene when a problem of solvency arises,” he said. Although Europe needed a “unitary state” to achieve this, “the political atmosphere (in Europe) has moved against integration,” he observed. “It is only under the pressures of a crisis that the politically impossible becomes possible,” he said.
Mr. Soros said his theory of financial markets rested on the premise that “markets do not tend to be in equilibrium,” like economists with a Newtonian mindset imagine them to be. He traced the emergence of the “super bubble,” in the 1980s to the Reagan-Thatcher era when “market fundamentalism became the dominant creed, which spread like a virus around the world.” Globalisation and the wave of deregulation, he said, laid the basis for successive financial bubbles.
“The moral hazard, arising from the expectation that the authorities would intervene when things went wrong, made things worse,” Mr. Soros observed. Government intervention, which resulted in lower interest rates, only enabled “leveraged credit,” which inflated the bubble further. The IT bubble of 2000 and the subsequent housing bubble in the U.S. were a result of these policies, Mr. Soros said. The “artificial life support provided to financial markets,” approved by the U.S. Congress by way of infusion of $700 billion, resulted in state credit substituting for private credit that had collapsed. “The action did not address the underlying causes that led to the crisis,” he said.
About his techniques of investing, Mr. Soros quipped: “I am very good at identifying bubbles, maybe more than there actually are.”
Referring to his childhood in occupied Hungary during the Second World War, Mr. Soros said he benefited greatly from his father. “He taught me that sometimes it is more risky not to take a risk,” he said.